My wife likes to go on cruises. She prefers to go with friends because I’m boring. You’ll find me poolside with my nose stuck in a good book. You’ll find her roaming around the ship participating in all the activities and games. Do you know what else you’ll find around the ship?
YETI tumblers.
They’re fantastic and keep your beverages hot or cold all day long. I went ahead and bought one and haven’t looked back since. Up until last year, the company that sells YETI stuff was private. If you wanted a piece of their future growth then too bad.
But not anymore!
In October 2018 YETI Holdings went public adopting the appropriate ticker – YETI. I was quick to add it to my watchlist on account of the ample stock liquidity. The level of trading in the options is so-so, but the bid-ask spreads are tight enough to play.
What’s perhaps most exciting is the level of volatility in the stock. It trades like ROKU or AMD and has a ton of premium in the options which makes building a trade easy.
That’s my intro. Now on to the main point of today’s piece. Let me share a recent trade example on YETI and show how I was able to turn a loser into a winner.
Watch Closely
On May 3rd, YETI tagged the 50-day moving average during a bull retracement pattern and began forming a bullish engulfing candle. Given the strength of its overall uptrend, I didn’t want to miss out if that particular day spelled the end of its retreat. So, I sold a June $25 naked put for 85 cents.
The tactic I adopt for most of my option selling ventures is to scale in. Essentially I start with a partial position and look to add at more favorable prices. For a naked put, that means if the stock drops further and the put increases in value that I can sell the rest of my position for higher premiums.
After my initial entry YETI decided to misbehave, falling some $5 further to $25. On May 8th, the put value had increased enough to justify adding another contract for $1.35. In doing so, I raised my average credit to $1.10.
Fast forward to today. YETI finally started to rebound with a sharp 8% pop on Monday, recouping all my losses in one fell swoop. Although the stock is about 10% lower than when I entered these bullish plays, I’m still slightly profitable.
Why?
Because I used a high probability strategy.
Because I scaled in.
Because I position sized properly, allowing me to sit through a fair bit of chop and adverse movement.
At this stage, I could exit with a small gain or see if this week’s bounce attempt can go the distance. My profit target for the 2nd tier I entered at $1.35 is 85 cents, so I will for sure be bailing on that if we can eke out one more up day. I want to make 50 cents per contract on the 1st tier, so that places my target at 35 cents.
Want to read about other adventures of being wrong and still profiting? Check out these two:
